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Faruqee, Hamid, 1995, “Long-Run Determinants of the Real Exchange Rate: A Stock-Flow Perspective,” Staff Papers, International Monetary Fund, Vol. 42 (March), pp. 80–107.
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The author would like to thank Luca Ricci, Emilio Sacerdoti, and participants in an IMF African Department seminar for their useful comments and suggestions.
This represents a relatively small sample period, especially when the estimation strategy includes use of the Johansen estimator. The short sample period did constrain the choice of estimation techniques to some extent; nevertheless, it was felt that the alternative of converting annual observations to a quarterly frequency via mechanical techniques as a means to increase the the number of available observations could alter the statistical results and unduly influence inference.
Source: IMF, International Financial Statistics database.
The INS methodology for construction of real effective exchange rates is discussed in Zanello and Desruelle (1997).
Sources: IMF, International Financial Statistics and World Bank, Global Development Finance databases.
Source: World Bank, Global Development Finance database. TOT is measured as an index with base year 1990 and expressed in log levels.
Source: World Bank, Global Development Finance database for OECD manufacturing labor productivity and IMF Recent Economic Developments papers for Madagascar. RPROD is measured as an index with a base year of 1990 and is expressed in log levels.
Sources: IMF, World Economic Outlook database and Recent Economic Developments for Madagascar, (IMF), various issues from 1970 to 1982.
Sources: IMF, World Economic Outlook database and Recent Economic Developments papers for Madagascar, various issues from 1970 to 1982.
These tests include the Schwartz, Akaike, Hannan-Quinn information criteria.
A dummy variable, D82, taking unit values for 1981 to 1983 was included as an exogenous variable in the VAR, to account for the substantial decline in per capita output due to the sharp decline in industrial activity attributed to the scarcity of foreign and imported inputs during the period.
The reported VECM also performed well when subjected to various model selection criterion and other statistical tests, including the Jarque-Bera test for the normality of residuals and Box Lung Q statistics against serial correlation. Wald lag restriction tests indicated that the lag length of three years could not be rejected. When this specification was estimated over various sample periods the hypothesis of cointegration could always be accepted and the normalized coefficient estimates of the cointegrating vector were consistently of the same sign and magnitude, as was the case with the speed of adjustment coefficient.
The import content of investment spending averaged over 70 percent during the period 1970-2000.
Since it is possible for the fundamental variables to diverge from their respective equilibrium values, it may not strictly be appropriate to term these estimates as “equilibrium” real exchange rates.
Using a smoothing parameter of 50.
Of course other smoothing and constant term adjustment techniques are available, including the use of moving averages of the fundamentals as in Elbadawi (1989) and MacDonald (2000), and choosing constant terms and equilibrium values for fundamentals as determined by other techniques, as in Paiva (2001).
Anecdotal evidence concerning parallel market exchange rates suggests that premiums also peaked during this period.
Creation of the MID led to the unification of the interbank and parallel market exchange rates shortly thereafter. Nevertheless, informal foreign exchange transactions still occur in Madagascar, with parallel market participants reportedly seeking to avoid the “paper trail” implicit in interbank market foreign exchange transactions.